How To Invest During A Market Crash

Summary/TL;DR

When simple facts about the history of stock market resiliency become known, “staying the course” is the only rational decision that one can make during market downturns. Because dividends, which have persistently been raised throughout history, are reinvested at lower prices, more shares of excellent companies are accumulated during crashes. Consequently, those who “stay the course” are far wealthier in the long run. Even throughout horrendous stock market crashes such as the Great Stagflation of 1973-1974, the tech-bubble of the early 2000s, or the Great Recession of 2008, those who remained invested were rewarded for their emotional restraint.

Introduction

Throughout market downturns, investors are often advised to “stay the course”, resist the urge to sell, and remain invested throughout the turmoil. Our instinct, however, is to “stop the bleeding” by selling before circumstances deteriorate further and buying back in “once things have calmed down”. Not understanding why remaining invested is the best path forward will inevitably lead to major mistakes being made due to poor reasoning like this.

In today’s post, we’ll discuss why “staying the course” works and will look at three of the worst stock market crashes in all of United States history (1973-1974, 2000-2002, and 2007-2009) and determine how well investors who followed this advice would have fared.

Why “Staying The Course” Works

The key to understanding why “staying the course” works requires an understanding of the following chain of reasoning:

1. The stocks you own should consist of massively profitable and successful companies run by the most talented executives in the world;

2. These companies have endured economic hardships of all sorts, not only living to tell the tale, but also consistently increasing their earnings throughout the toughest of times;

3. Over a period of many years, massively profitable and successful companies who consistently increase their earnings will be worth far more than they are today;

4. If the above statements are true, which any objective examination of history will demonstrate, then the amount of ownership accumulated in these companies is far more important than how the market is valuing that share of ownership in any given day, week, month or year. In other words, your wealth is more accurately measured by the amount of shares you’ve accumulated in great companies, not by the dollar amount that those shares happen to be worth at a given point in time;

5. Every year, at least once per quarter, these companies pay dividends (which have consistently risen over time) that are subsequently reinvested to purchase more shares;

6. During a market crash, this dividend reinvestment occurs at fire-sale prices, scooping up far more shares than would have otherwise been purchased if the crash had not been present;

7. Investors who “stay the course” are therefore wealthier in the long-run because of the market downturn.

A few simple facts will provide the points above with historical context: In 1960, one share of the S&P 500 was worth $58.11 and paid a dividend of $1.98. At the end of 2024, this same share was worth $5,881.63 and paid a dividend of $74.83, representing annualized rates of return of about 7.4% and 5.8%, respectively. The total return, that is, the return earned when accounting for growth and dividends being reinvested, was 10.5% annualized.

You might notice that the dividend alone paid in 2024 was 29% more than what the share itself was worth in 1973! In fact, that single share (originally worth $58.11), with all dividends reinvested, would have grown to about 6 shares worth over $35,000 that paid almost $450 in dividends in 2024 and about $5,500 in dividends throughout its lifetime!

This incredible journey of wealth building was anything but smooth sailing, however. Throughout this same period, a long-term stock investor would have seen their wealth be cut in half three times in market crashes of historic proportions – once in the Great Stagflation of 1973-1974, a second time during the Tech Bubble of the early 2000s, and once again during the Great Recession of 2008. We’ll spend the rest of today’s post examining how the “stay the course” strategy turned out for long-term stock investors during these historically catastrophic crashes to provide our analysis above with real-world data.

Any discrepancies between my numbers and the accompanying visuals provided below (which should be relatively minor) are due to the different sources used in collecting the relevant data.

1973-1974 – The Great Stagflation

At the peak of the market in 1973, one share of the S&P 500 was worth about $92 and paid a dividend of $3.61. By the time the market recovered in 1980, its dividend had risen to $6.44, an increase of 78%. An investor with $1,000,000 who remained invested from beginning to end would have reinvested $373,000 in dividends, and their portfolio would be worth about $1,400,000 representing an annualized rate of return of about 4.63%.

Even though the market didn’t recover until 1980, this investor’s portfolio recovered by 1977 thanks to the additional shares accumulated through dividend reinvestment. These shares would contribute to thrusting the portfolio along to new all-time highs in the bull market that inevitably followed the bear. Ten years after the market peak, their portfolio would be worth about $1,925,000, representing an annualized rate of return of 6.78%.

2000-2002 – The Tech-Bubble

At the peak of the market in 2000, one share of the S&P 500 was worth about $1,550 and paid a dividend of $16.07. By the time the market recovered in 2007, its dividend had risen to $28.14, an increase of 75%. An investor with $1,000,000 who remained invested from beginning to end would have reinvested almost $190,000 in dividends, and their portfolio would be worth about $1,200,000 representing an annualized rate of return of about 2.49%.

Even though the market didn’t recover until late 2007, this investor’s portfolio recovered by early 2006 thanks to the additional shares accumulated through dividend reinvestment. Ten years after this crash, the market was in the middle of recovering from the Great Recession (discussed next), but by the time it recovered in 2013, this investor’s portfolio would be worth about $1,400,000, representing an annualized rate of return of 2.44%.

The crash of the early 2000s was arguably the beginning of the worst period in stock market history since the Great Depression. In the 10 years after 2000, the market would lose half of its value on two separate occasions, with the second crash almost immediately following the recovery from the first one. This period therefore provides us with an exceptionally strong example of how staying the course works no matter how bad things appear to be.

2007-2009 – The Great Recession

At the peak of the market in 2007, one share of the S&P 500 was worth about $1,575 and paid a dividend of $28.14. By the time the market recovered in 2013, its dividend had risen to $34.90, an increase of 24%. An investor with $1,000,000 who remained invested from beginning to end would have reinvested about $406,000 in dividends, and their portfolio would be worth about $1,135,000 representing an annualized rate of return of about 2.36%.

Even though the market didn’t recover until late 2013, this investor’s portfolio would have almost entirely recovered by mid-2011thanks to the additional shares accumulated through dividend reinvestment. Ten years after the market peak, their portfolio would be worth about $2,000,000, representing an annualized rate of return of 7.45%.